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10/27/15

I t’s been a painful year for energy investors with most oil-related
stocks down significantly. One of the few exceptions to this rule of
thumb is the refining sector as many refining companies have seen
substantial benefits from the fall in the price of oil.

As crude
prices have collapsed, gasoline and other derivative product prices have
been coming down much more slowly. As a result, spread margins have
widened considerably and refiners have seen profits boom. Companies like
Valero and other big
name refiners have seen their stock prices leap higher as the glut of
crude has led many oil producers to rush to sell their production.

What the markets gives, the markets take away though, and as oil
prices have rebounded a bit over the last few weeks, many analysts now
see refining margins shrinking back closer to pre-collapse levels.

For
European refiners in particular this may be a major problem going
forward. U.S. refiners are still benefiting from the export ban on most
U.S. produced crude which in turn distorts the price for U.S. crude,
holding it down and inflating refiner margins. European refiners have no
similar advantage.

European investment managers appear to be getting nervous
and some are taking profits and reducing their bets on the refinery
sector. European refiners Saras S.p.A, Neste Oyj, Hellenic Petroleum,
and other independent refiners have posted returns averaging 28 percent
year-to-date, surpassing all other groups on the Stoxx Europe 600 Index.

But margins appear set to eventually shrink by around 65 percent from
$8.85 per barrel to around $3.10 a barrel according to Wood Mackenzie
Ltd. The firm is looking for refiners to return to historical norms,
and while the timing on that return may be up in the air, the stocks
are unlikely to keep moving higher in the medium term, Wood Mackenzie
analysts say. The firm expects refinery margins to shrink by 50 percent
in 2016 vs. 2015.